Federal Reserve poised for final rate cut this year amid growing divisions

The Federal Reserve is poised to cut US interest rates for a third consecutive time as it readies for its final meeting this year amid growing divisions over future moves and little clarity on the economic outlook.

At the heart of this discussion is the Fed's dual mandate, which makes the US central bank distinct among its peers. For months, the Federal Open Market Committee (FOMC) has been grappling with which side of this mandate to prioritise: tackling inflation or shoring up employment.

“In this scenario, there are no easy answers. The question is, which side do they want to be wrong on,” said Derek Tang, an economist at LHMeyer/Monetary Policy Analytics.

Signals in futures markets indicate the Fed will, for a third straight time, coalesce around employment concerns and cut rates by 25 basis points, according to CME Group data. Six of the seven central banks in the Gulf Co-operation Council are expected to follow the Fed's decision because of their currency pegs.

Hawks and doves

Fed observers anticipate dissent to emerge following the central bank's decision on Wednesday. This underscores the lack of clarity facing a rate-setting body that has often moved in unison throughout Fed Chair Jerome Powell's seat at the centre of the table.

“The FOMC has grown increasingly split over its near-term course of action,” Wells Fargo economists wrote to clients.

Data in recent months has shown increasing tension between inflation, which remains above the Fed's 2 per cent target, and a weakening labour market. Interest rates are the Fed's primary tool to address these, but it cannot tackle both simultaneously.

Fed hawks, who are more cautious about rate cuts, have expressed greater concern that inflation has not meaningfully climbed down towards the 2 per cent target. Hawkish dissent has been most profound among regional Fed presidents, who serve rotating terms on the FOMC.

“It will likely be appropriate to keep policy rates at the current level for some time to balance the inflation and employment risks in this highly uncertain environment,” Boston Fed President Susan Collins said last month.

Delayed core inflation data released on Friday clocked in at 2.8 per cent year-on-year in September, only slightly below the August reading.

Two influential Fed members have expre